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Mester: Federal funds rate should rise before all goals are met

The US Fed's Loretta Mester gives the all-clear for 2015 (Part 11 of 13)

(Continued from Part 10)

Accommodative monetary policy to fuel growth

The credit crisis and the ensuing recession left the US economy (SPY) (IVV) in first gear. Shortly afterward, the Federal Reserve put in place an accommodative monetary policy to fuel economic growth, promoting its dual mandate of price stability and maximum employment. The Fed introduced certain quantitative easing, or QE, measures, including a series of large-scale bond purchases of long-term Treasuries and mortgage-backed securities.

The Fed’s large-scale purchase of mortgage-backed securities impacted the real estate and mortgage market which is tracked by the Vanguard REIT Index Fund (VNQ) and the iShares U.S. Real Estate ETF (IYR). VNQ has invested 8.3%, 4%, and 3.6% of its holdings in Simon Property Group (SPG), Public Storage (PSA), and Equity Residential (EQR), respectively.

Federal funds rate held at zero lower bound

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Since the end of 2008, the FOMC (Federal Open Market Committee) has kept its policy rate—the federal funds rate—at essentially zero. The zero lower bound federal funds rate has, since then, lent important support to the economy. We can see progress in labor market indicators—discussed in Part 9—and the pace of growth—discussed in Part 8.

In Ohio recently, Loretta Mester, President and CEO of the Fourth District Federal Reserve Bank of Cleveland, shared her views on 2015 monetary policy and her economic outlook. Mester pointed out that as the economy gradually approaches its normal state, monetary policy needs to too.

Policy rate should rise: Mester’s views on the liftoff

“Since monetary policy decisions affect the economy with a lag, policymakers need to be forward-looking,” said Mester. Based on this, Mester said she expects it will soon be appropriate to begin moving up the policy rate from zero bound. And since policy needs to be forward-looking, the liftoff should occur before the FOMC’s goals are fully met. In this case, the policy may need to remain accommodative for some time even after the liftoff has been initiated to attain the FOMC’s goals. Mester is comfortable with the liftoff taking place in the first half of 2015.

Continue to Part 12

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